Celsius Holdings, Inc.

Greetings and welcome to Celsius Holdings, Inc. Third Quarter 2021 Financial Results. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Cameron Donahue, Investor Relations for Celsius Holdings. Thank you. You may begin.

Thank you, and good morning, everyone. We appreciate you joining us today for Celsius Holdings' third quarter 2021 earnings conference call. Joining me on the call today are John Fieldly, Chairman, President, and Chief Executive Officer, and Edwin Legrand, Chief Financial Officer. Following the prepared remarks, we'll open the call to your questions and instructions will be given at that time. The company released their earnings press release pre-market this morning. All materials will be available on the company's website Celsius Holdings, Inc. dot com under the investor relations section. As a reminder, before I turn the call over to John, an audio replay will be available later today. Please also be aware that this call may contain forward-looking statements which are based on forecasts, expectations, and other information available to management as of November 11, 2021. These statements involve numerous risks and uncertainties, including many that are beyond the company's control, except to the extent as required by law Thank you, Cameron. Good morning, everyone, and thank you for joining us today. In the third quarter, Celsius not only achieved another sales record for the quarter,

but beat our previous quarterly record from Q2 by almost 50%, beating by 46% growth on a sequential basis from Q2 2021. The company accomplished this exponential growth despite their tremendous supply chain constraints that continue to impact the industry. In order to hit the majority of our orders during the quarter, We did have to sacrifice some efficiencies on the margin side, which we believe are either one-time costs or short-term in nature, with specific identifiable processes we are implementing to improve our margin profile going forward. The largest one-time costs impacting margins during the quarter stem from the build-out of our six orbit distribution warehouse centers, which we announced in the second quarter. We expect to see tangible efficiencies in both miles on cases freight costs as well as reduced inventory stock outs with our distribution partners going forward from this initiative. But we did have incremental costs in Q3 as we essentially moved from two main warehouse centers to six while also significantly expanding inventory runs with our co-packers. With this, we had excess freight costs as we built out and optimized inventory levels across our warehouses which is reflected in our cost of goods and we estimate impacted margins by approximately 3% for the quarter. In addition, we experienced increased freight costs associated with higher labor fuel costs which we are monitoring as on average freight costs have increased industry ride by 20% versus the prior year per DAT trend lines who tracks freight trends nationwide. In addition to short-term margin impacts, we continue to utilize international cans sourced, which carry a higher cost. When we placed these can orders, we expected the vast majority to come in and be utilized during 2021. Unfortunately, many are still outside of the United States and are waiting at ports to be unloaded, which have been offset by purchasing spot rate cans from the U.S. suppliers. But with the significant increase in aluminum prices, spot rate increased significantly. With that said, the higher spot rate as well as the higher import cans have impacted margin for the quarter by approximately 5.3%. With that said, we experienced short-term and one-time margin impacts during the third quarter, which totaled approximately 7.5%. When taking this into account, our normalized margins would have been approximately 47.2% for the quarter, including outbound freight. To further optimize our supply chain going forward, we have added two new contracts with two of the top US can manufacturers for 2022, which will move us away from the higher spot rate purchases and international cans. We believe we have adequate US can stores for 2022 to support our growth. We will likely have to cycle, though, some of the international cans that have been delayed depending on when they arrive and get delivered in the U.S. through the first six months of 2022. But we expect the vast majority of our cans will be from U.S. sourced on a contract basis materially reducing our can costs versus 2021. Some other cost increases we saw in the third quarter, such as raw materials, co-pack fees, tolling fees, and inefficient less-than-load shipping costs. We expect the majority of these will be offset in 2022 as we continue to negotiate better pricing with our scale. While it remains uncertain, the energy category is one of the lone outliers that have not increased pricing. Driven by the top two players in the space, we believe the key factor in that decision is due to the rapid growth in consumer demand for functional performance energy drinks and the associated increase in new brands coming to market. The smaller scale new entrants face significant higher shipping, raw materials, co-pack fees, competition, and by not taking price, the top two energy drink place an outsized cost on the new entrants entering the market to protect their share. For Celsius, we have reached a critical mass where we will not impact our ability to grow, as evidenced by the record third quarter. And the only downside is that some of the expedited scale-based incremental margin improvements are being offset by cost increases that are not transitory. Even with that, longer term, We expect margin expansion throughout 2022. As stated prior, we have identified one-time and short-term cost increases and have planned strategies to mitigate as we continue to optimize and transition our stores to DSD distribution with further future scale-based benefits with our current growth trajectory. To conclude our margin analysis, as we recognize revenue growth rates more than double in North America to over 200% and continue to accelerate further, we made a cautious decision in the third quarter to ensure that we had the operational infrastructure to support our revenue growth to much higher levels and fully take advantage of the opportunities to take market share at an increased pace. As such, we accelerated initiatives on several operational improvements to position us for exponential future growth, which impacted margins by approximately 7% just from the one-time items in the third quarter. Additional incremental near-term benefits will be recognized if price increases are initiated by the top brands to our 2022 expectation. In the meantime, we are implementing and further evaluating our promotional strategies. We wanted to ensure we provided a detailed breakdown on margins and that our forward expectations of continued leverage remain unchanged before we detailed the record achievements accomplished in the third quarter. Our record third quarter results are representative of the momentum that the Celsius brand is achieving across the board. Revenue growth driven by continued new store additions, SKU expansion, cold placements, DSD coverage expansion, as well as continuing to transitioning existing accounts Brand recognition, influencers organically supporting Celsius are just a subset of the drivers that accumulated in the record for third quarter results in North America. Total sales for the quarter totaled $94.9 million up 158% from $36.8 million in the year-ago quarter. Our domestic sales revenue increased 214% to $84.5 million up from $26.9 million in the year-ago quarter with both of these percentage growth rates increasing. The highest in our history and the North America sales up 58% from the second quarter sequentially. We continue to see two of our hardest hit channels from COVID, our fitness channel and our vending channel, not only rebound by the drive of new sales records with again reaching triple digit growth rates and contributing approximately $5.2 million in incremental revenue when compared to the prior year. International sales grew 5% to 10.4 million for the quarter and 18% to the first nine months of this year. We are still dealing with the impacts of COVID-19 most pronounced in the European markets with all markets facing increased costs and raw materials transportation. Our EU, Middle East, Southeast Asia and Australia operations remain adversely affected by COVID-19 with varying restrictions and lockdowns in the markets. Overall, we continue to see Quarterly improvements quarter over quarter with capacity restrictions as well as reopenings and the hardest hit channels, but there still remains uncertainty as there could be potential reclosings due to new variants during the winter months and case increases in the regions of operations which could force closures in some states and countries. Turning to some additional financial highlights for the quarter, our domestic revenue reached that $85.4 million was driven by accelerated triple growth in our channels of trade expansion with world-class retailers, further activation and growth from our distribution partners. Direct store delivery network grew over 429% in revenues when compared to the prior year. Also, our club channel continues to accelerate. Following the expansion rollout of over 550 plus Costco stores, and late Q2 to Q3, Costco growth now has been listed as just over a 10% revenue customer. We are also now rolling out onto their platform, Costco.com. In addition, Sam's Club, we are launching in several test markets during the fourth quarter, driven by the strong growth in Walmart. On the convenience channel side in North America, the latest SPINS data shows a growth of 205.5% year-over-year increase for the Celsius product portfolio in the convenience channel Compared to a 13.6% overall growth in the energy drink category as of October 3rd of 2021, last 12 weeks, while during the same period our ACV increased 118% versus the prior year to 34.7% total ACV average. Industry-backed third-party data continues to show accelerated growth metrics. and we are confident that Celsius will continue to drive sales even higher as we continue to accelerate our ACV across channels through additional launches with new nationwide chains and transitioning existing accounts to our DSD network. Consumer demand for Celsius accelerated through the third quarter of 2021 to record levels with the most recent Nielsen scan data as of October 23rd, 2021 showing Celsius sales up over 205% year over year for the two weeks Plus 213% for the four weeks and plus 204% for the 12 weeks with a two share of the energy drink category overall for the last four weeks. This compares to the total energy drink category, which grew 14% year over year for the two weeks ending and 12% for the 12 weeks ending over the same period. On Amazon, Celsius is the second largest energy drink with a 18.4 share of the energy drink category. 2.88% ahead of Red Bull at a 15.5 share and just 7.6 share behind Monster Energy at 25.9 share last four weeks ending October 30th, 2021 per Stackline Energy Drink category total US. Transitioning to DSD continues and remains a top priority with our retail partners due to the increased velocities that are gained through the preferred route to market. Today, for our latest MULOC retail sales data, we estimate that we have transitioned and initially optimized approximately 50% of the stores reporting in to SPIN's MULOC channel and have further plans and expansion with additional DSD partners through the backup of Q4 and into 2022. Some of the key retailers that have transitioned over 75% of their stores include Target, Walmart, Racetrack, Kroger, Circle K, Speedway, Murphy's USA, with CVS and 7-Eleven also expanding in other markets. Historically, it takes on average two to three months to optimize stores once they have transitioned to DSD before we see that increased velocity levels. In addition to transitioning retailers and activating our DSD network, We continue to roll out Celsius branded coolers in the third quarter with an additional 400 coolers placed and over 900 coolers for the first nine months of 2021. We have also implemented comprehensive tracking tools in place to monitor accelerated growth metrics with our retail partners and we plan additional cooler expansion initiatives through the remainder of 2021 with accelerated rollout in 2022. Today in the United States, our total door count now exceeds 118,000 locations nationally, growing 38,000 doors or 48% from the beginning of 2021, with additional expansion planned throughout 2021 and into through 2022 as retailer resets take place. In Europe, our Nordic sales totaled 9.5 million compared to a similar amount in the prior year. Thank you for joining us today. with the pending can new redesign and launch, but increased to 9.3% of the total energy market in Sweden in September. In Finland, we launched a mint chocolate bar with a holiday theme wrap highlighted with in-store displays to secure space during the holiday season. We also launched a great tasting new RTD protein line, which is launching in the fourth quarter with initial orders of over 300,000. We believe this is a great test market for our products with additional geographic expansion opportunities. Additionally, the fast portfolio bar launched in the U.S. Sales have been going extremely well. They've actually increased 50% in the third quarter from the prior QT run rate, validating the opportunity for further U.S. expansion and potentially expanding in the fitness channel in 2022. We've recently also launched on Amazon EU expanding Expansion began in the United Kingdom with launched three flavors, six fast bars, and Germany also expanded and launched today, most recently, with three flavors of the Celsius portfolio, and we expect additional EU countries to come online in the first quarter and in Q1. In China, we maintain a licensing royalty model in the market where distribution covers approximately 76 cities and approximately 60,000 locations, and we see great opportunities in this growing market. Now moving to the marketing, on a marketing front, we continue to accelerate and target new consumers and existing consumers where they live, work, and play, building meaningful and emotional connections through robust integrated marketing programs, reaching more consumers each and every day. We're not only driving growth in the energy category, but we're also expanding the demographics while bringing an industry-leading percentage of consumers from outside the category who are new. We have also reached another inflection point in our operations and growth. one which positions Celsius for exponential growth and market share gains. We have committed the resources, both in personnel and operational infrastructure, to maximize this opportunity and support the incremental growth drivers our national DSD distribution platform has opened in the convenience store channel in the United States. We are also not only seeing significant expansion in ACV across all channels, but doing so while increasing our velocities at retail. We are in a unique position to see material concurring growth and both due to we are just materially entering the most productive convenience channel in the United States while transitioning our existing accounts to DSD network where we have seen incremental growth post-transition. Our team is ready. Our infrastructure is in place to support the sales growth we expect on an expedited basis. I will now turn the call over to Edwin Negron Caballa, our Chief Financial Officer, for his prepared remarks.